Venezuela and Lessons on How to Help The Poor

Bloomberg today has a piece on Venezuela and the now infamous food lines the country possesses.  Their conclusion is a head-scratcher, though.  They conclude that there are food and consumer good shortages because inflation in the black market is higher than increases in worker pay, so many cannot stand to purchase items in the black market and must turn to the state-run (and subsidized) grocery stores.  They argue that the stores cannot keep up with demand, and thus the long lines for non-existent goods.

To me as an economist, this conclusion gets everything all turned around.  The reason the black market exists is because the government-run stores do not supply the goods the people need.  In fact, the price controls cause the shortages in the stores.  People do not turn to the government stores because the black market is expensive.  They turn to the black market because the government stores don’t have what they need!

One of the first lessons taught in economics is about supply and demand and how, when prices are kept artificially low, it creates shortages.  That is exactly what is going on in Venezuela right now: the government put a price-control on many consumer goods, which created a shortage and allowed the black market to pop up.  The black market prices are higher because the prices reflect the true supply/demand situation of the goods as well as the true value of the bolivar.

So here we see the great divergence between intentions and results.  The Venezuelan government, prima facie, tried to help the country’s poor by instituting price controls.  All that happened was the (predictable) result that the poor were made worse off, and the rich better off.  If the Venezuelan government really wants to help its people, it would abolish the price controls, both on consumer goods and the bolivar.  This would allow goods to flow to where they are needed, as well as give the Venezuelan people a much-needed pay raise.

The tl;dr version: markets help people, government intervention hurts them.

3 thoughts on “Venezuela and Lessons on How to Help The Poor

  1. The article seems to be about the black market in currency, not a black market in food. The shortage in food needs a different explanation, based on the price the government pays for the food sold in its stores.

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    • Not really. The reason for the shortages remain the same: price controls. The inflation in the currency is just the “real’ price of food. The article claims that people must wait in food lines because the black market price is too high, but that is putting the cart before the horse. The black market price is high because there is a shortage of food given the price controls

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